Testing Real Interest Parity in the European Monetary System

Bank of England Working Paper No. 2

Posted: 5 Aug 1998

Date Written: July 1992

Abstract

Current discussions on Economic and Monetary Union (EMU) in Europe have stressed the need for enhanced integration of goods and factor markets as a pre-condition of moving as costlessly as possible to a single currency system. The real interest differential--and hence tests of real interest parity--provide a summary measure of the degree of residual integration necessary such that these conditions are met. Empirical tests suggest a rejection of real interest parity among European Monetary System (EMS) member countries, at least during recent years. Further, a decomposition of the differential suggests that imperfect integration of goods markets, as reflected in a failure of ex-ante PPP, is largely responsible for this finding.

Suggested Citation

Haldane, Andrew and Pradhan, Mahmood, Testing Real Interest Parity in the European Monetary System (July 1992). Bank of England Working Paper No. 2, Available at SSRN: https://ssrn.com/abstract=112608

Andrew Haldane (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mahmood Pradhan

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

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